Danone Says China Recalls Hurt Baby-Nutrition Sales in Asia

Danone, which gets 20% of revenue from baby nutrition, recalled the products in eight markets.

Julie Cruz

Danone said baby-nutrition sales will fall in the third quarter because it recalled infant- formula products in Asia after a warning of tainted ingredients in some products supplied by Fonterra Cooperative Group Ltd.

The recalls had a "significant" impact on sales in the region, though Danone still expects to post organic revenue growth of about 5 percent in the quarter, it said today.

"We are deploying action plans to restore sales in affected markets," Chief Financial Officer Pierre-Andre Terisse said in a statement. "Their success will enable Danone to meet its growth and margin targets for 2013."

Danone, which gets 20 percent of revenue from baby nutrition, recalled the products in eight markets, including New Zealand, China and Hong Kong, as a precautionary measure. The findings of an investigation of Fonterra by authorities in New Zealand concluded that all ingredients used by Danone are in "full compliance with the highest standards of quality," the maker of Activia and Actimel yogurts said today.

Danone will conduct communication campaigns for its Dumex baby-nutrition brand to rebuild trust through both the mass media and the Internet, spokeswoman Agnes Berthet-d’Anthonay said by phone today. The company is confident these action plans "will show results," she said.

Maintaining Forecast

Maintaining its forecast for 5 percent organic sales growth in the third quarter may indicate a better-than-expected recovery in Danone’s dairy business, according to Jon Cox, head of European consumer equities at Kepler Cheuvreux in Zurich.

"I presume sales in the impacted region have fallen over 20 percent in August and there has been no improvement in the trend," Cox said. He estimates that countries affected by the recall account for about 45 percent of Danone’s baby-nutrition sales, or about 10 percent of total revenue.

Danone’s ability to maintain sales growth in the face of adversity is "positive," according to Fabio Fazzari, an analyst at Equita SIM SpA. "If you are able in this particular environment to completely offset a negative impact in an important area like Asia maybe the underlying trend is better than people think," Fazzari said by phone.

Danone, based in Paris, reported second-quarter sales growth that beat analysts’ estimates on July 29 as the company sold more baby-nutrition products in China. Sales of baby- nutrition products surged in the country after a spate of food- safety scandals fueled frenzied demand for foreign formula.

Danone was informed about the contaminated Fonterra whey protein on Aug. 2 and started preemptive recalls of affected milk powder products in China on Aug. 4, it said.